When the hurlyburly’s done – nationalism, devolution and another turbulent period for Scots law firms

Devolution, nationalism and the dramatic shake-up in its political landscape – it’s been another turbulent period for Scots law firms.

In the early hours of 8 May, Alex Salmond, the former leader of the Scottish National Party (SNP), delivered his victory speech after being returned to Westminster as MP for the constituency of Gordon, Aberdeenshire, ousting the Liberal Democrats from the seat.

‘There’s going to be a lion roaring tonight, a Scottish lion, and it’s going to roar with a voice that no government of whatever political complexion is going to be able to ignore,’ he declared.

In the wake of a landslide in Scotland that saw the SNP winning 56 of 59 seats and effectively handing the Conservative Party a winning majority in Westminster, party leader Nicola Sturgeon declared that the ‘tectonic plates in Scottish politics have shifted’.

The result of the General Election is a fitting bookend to a tempestuous 12 months for the Scottish legal market. Beginning with CMS Cameron McKenna’s acquisition of Dundas & Wilson on 1 May 2014, the past year has seen established players such as Shepherd and Wedderburn and Maclay Murray & Spens recover after years in the doldrums with recently emerging market leaders, Brodies and Burness Paull, continuing to strengthen, at the same time as a longstanding feature of the Scottish legal scene, Tods Murray, perished. All of this came against a backdrop of economic recovery, a referendum on Scottish independence and the build-up to the General Election.

‘As a result of what has happened, Scotland may not be independent, but it will be more Scottish,’ says Philip Rodney, chair of Burness Paull. ‘The legal market will be more distinct from the rest of the UK. That will bring opportunities and threats.’

Rampant lion

With the election largely giving the City the result it wanted (see ‘Fault Lines’, LB254), albeit with a highly uncertain referendum over the EU looming, many feel that things may now settle down and provide the financial markets with some stability. But the result of the election brings together the Conservatives and the SNP, which holds Scotland and 56 seats in Westminster, two governments that are diametrically opposed – and not just on constitutional issues.

However, as Alastair Ross, director of public policy at Pinsent Masons, points out in his blog ‘What can we expect from the SNP at Westminster?’, ‘as an increasing number of business regulation and policy issues straddle the border then neither [party] can afford to be dragged into continual dispute – they need to demonstrate that the UK remains a viable and attractive marketplace for investment regardless of the political result’. He adds that some of the new SNP MPs, including lawyers Joanna Cherry QC and Tasmina Ahmed Sheikh, could be ‘real allies for business’.

An early stand-off emerged within days of the election, with the SNP challenging the Conservative government over plans to replace the Human Rights Act with a British Bill of Rights. The SNP threatened to withhold legislative consent on the Conservative proposals, arguing that devolution legislation commits the Scots government and parliament to comply with the Human Rights Act and the underlying European Convention on Human Rights. It remains unclear whether this represents much of an obstacle to the plans.

More threatening, an EU referendum in the UK could trigger a fresh Scots vote on splitting the union, given the widespread support in Scotland for remaining in Europe.

Fundamentally, however, the Scottish lawyers see few fundamental changes for their businesses and their clients. There may be some micro-level changes that will arise from a greater Scottish presence in Westminster (for example, the rest of the UK will soon follow the Scottish government’s Zero Waste Regulations and start to ban certain types of biodegradable waste from landfill and impose segregation and separate collection of food waste. A stronger SNP presence at Westminster may be able to speed up the rate of progress towards this goal), but at a broader level, the more significant changes will be brought about by the passing of a draft bill encapsulating the Smith Commission proposals on further devolutionary powers to the Scottish government. Powers that Smith recommended be devolved to Scotland include giving the Scottish parliament the power to set income tax rates and bands, but not to alter the threshold above which tax is paid. It also proposed a proportion of VAT raised in Scotland should be assigned to Holyrood and air passenger duty fully devolved.

Burness Paull head of corporate finance Peter Lawson commented ahead of the General Election on the likely fallout from the SNP winning greater influence in Westminster, saying: ‘Speaking to corporates/bankers/corporate finance intermediaries in the market, many seem remarkably sanguine about this prospect. Corporates just want to get on with growing their business. The referendum provoked bigger concerns, particularly in the financial services sector, although it is acknowledged that this is likely to come back onto the agenda at some point. Much of the deal-flow in Scotland involves an overseas buyer. On the whole, they are not put off by the independence issue.’

In itself, the mere return of a large number of SNP MPs is not likely to materially affect the legislative framework that impacts day-to-day business, although especially in areas such as oil and gas, the vocal support that the SNP has lent to the North Sea oil industry, and the importance of that industry to Scotland in terms of supply of energy and highly skilled jobs, has been encouraging (see box, ‘Granite city’). Far more significant is bringing greater pressure to bear on implementing promises made by the main parties to Scotland ahead of the referendum on Scottish independence last September and, ultimately, moving towards full fiscal self-determination.

‘People typically say that commercial businesses don’t like uncertainty – I’m not entirely sure I agree with that as uncertainty brings opportunity,’ says CMS Cameron McKenna Scottish senior partner Laurence Ward. ‘CMS and Dundas & Wilson merged before the referendum and fully understood that the result could go either way. Regardless, we were and we remain very committed to the Scottish market. The thing you have to look at is whether you believe that, whatever the politics, there is going to be a strong market for legal services and I think the answer to that is yes.’

Independence day

Re-installed Prime Minister David Cameron faces fundamental constitutional pressure on two fronts now. Firstly, he will have to deliver on the pledge to hold a referendum on a potential exit from the EU by 2017 and secondly, given the scale of the SNP’s victory, face a renewed interest in another referendum on Scottish independence. While Nicola Sturgeon in the immediate aftermath of the win has stated that the election result was not about another referendum and the SNP manifesto did not provide for one, she is also clear that neither does it give the government the right to rule out a second referendum. As Ross comments: ‘[SNP] opposition to the Conservatives and the Labour performance closes down much of the “progressive alliance” Nicola Sturgeon had hoped to leverage to Scotland’s benefit. We can expect the SNP bloc at Westminster, together with Scottish ministers, to push for further devolution beyond the draft legislation published in January and building upon the recommendations of last November’s Smith Commission.’

Response to the net effect of the October 2014 ‘no’ vote, the ‘vow’ to Scotland ahead of the referendum, signed by David Cameron, Nick Clegg and Ed Miliband, the subsequent setting up of the Smith Commission and publication of legislative recommendations has been fairly lukewarm. Perhaps the timing was wrong, with any devolutionary momentum neutered by a wait-and-see approach brought on by the impending General Election last month: the House of Commons will need to vote on the legislative proposals put forward for extra powers for the Scottish Parliament and that was never going to happen until after 7 May.

Understandably, leading Scottish law firms want to remain neutral on the subject. Stephen Gibb, chief executive of Shepherd and Wedderburn, says the firm set up a constitutional reform group a few years ago, advising a number of clients through the whole pre-referendum process about implications on a neutral basis as a range of industries, not just financial services – real estate in particular – were interested. However, the outcomes were uncertain, he adds, depending on the result of the election.

‘The whole point of the Smith Commission was to follow through on the pledge by those three UK parties,’ says Bill Drummond, managing partner of Brodies. ‘Clearly nothing was going be enacted in law until after we knew what the UK Government was going to be. There had been a lot of comment around the Smith Commission to the extent of preparatory work for legislation. Although post-referendum the law had immediately changed in the minds of certain people, we have to have a UK government in place to introduce the primary legislation to make all that happen.’

The main concern is any move towards full fiscal autonomy and the effect this could have on the financial services sector in Scotland, although these concerns have abated slightly now the SNP has effectively lost the ability to leverage more powers from Westminster to Holyrood as the price of an alliance with Labour to form a working government. The SNP may now try to accelerate the coming into effect of new devolutionary powers on income tax promised in Smith and also has designs on increasing its control over income tax on investments and capital gains tax. It is less likely now, but were the SNP to have the power to levy taxes differently in Scotland, and if they were materially higher than elsewhere in the UK, there is a danger of chasing away higher-salaried jobs to other parts of the country.

Top-ten Scottish deal advisers by volume, January to December 2014
Firm	Volume	Value (£m)
CMS*	99	£8.27bn
Burness Paull	83	£2.5bn
Pinsent Masons	64	£5.04bn
Shepherd and Wedderburn**	56	£1.82bn
Brodies	55	£633.69m
Harper Macleod	51	£330.82m
DLA Piper	46	£3.13bn
Maclay Murray & Spens	46	£1.27bn
HBJ Gateley	36	£497.7m
MBM Commercial	24	£18.8m
* Includes Dundas & Wilson ** Includes Tods Murray	Source: Business Insider

Knock-on effect

There is some debate over how the political shake-up in Scotland is going to affect the Scottish legal market and this difference of opinion extends to how much the build-up to the referendum also affected work levels. Burness Paull’s Rodney is bullish: ‘Corporate Scotland has just been getting on with things before, during and after the referendum. I haven’t sensed a hiatus or that people are waiting to see what happens. It’s business as usual.’

Others are less effusive. CMS’ Ward says a combination of events led to a sluggish summer in 2014. ‘It was a strange period, partly because of the referendum, partly because of the World Cup, the Commonwealth Games [in Scotland], and the Ryder Cup [in Scotland] – one after the other. There was a time where things were slow; people were distracted. I wouldn’t say the referendum was the only issue but it was one of the factors that made people say “well, we’ll wait and see” – make decisions on a more informed basis. I can say for a fact that since autumn last year the market has picked up quite considerably.’

Richard Masters, Scotland-based head of client operations at Pinsent Masons, says there were two clearly defined periods in 2014/15: before the referendum and after. ‘Where we saw an impact was the whole independence debate; without any shadow of a doubt that led to two things – quite a significant slowdown, people were looking for clarity in terms of what was going to happen and secondly the flip side, when that was resolved we saw some very significant deals moving through that had previously been on hold. We completed some of Scotland’s biggest commercial property deals very quickly after the vote had gone through, which had been sitting in the wings.’

This is backed up by client feedback as well. Carolyn Jameson, senior director and general counsel of Edinburgh-based travel search engine Skyscanner, says: ‘I’m sure the independence vote made everybody quite unsettled for quite a period of time, just waiting to see what happened. Since then, people have been able to breathe a sigh of relief and say: “Right, it’s all certain, we know where everything is and we can focus on growth rather than what might happen.”’

As a UK-wide, top-25 Legal Business 100 firm, Glasgow-based corporate partner Paul Pignatelli at DWF says the effect of the referendum was there for all to see. ‘The Scottish referendum clearly did impact the appetite for deals and growth in Scotland – and naturally so. It is only normal for businesses to be more cautious and risk-averse with concerns around political uncertainties and over-regulation.’

Meanwhile, post-financial crisis success story Brodies has continued to build on the momentum that has seen the firm’s revenues grow by 46% to more than £50m since 2009/10. Drummond says business was materially stronger in the run-up to the referendum and there was evidence that month-on-month its lawyers were working harder. That drove right through to the half-way point at the end of October. ‘We’ve sensed that some sectors have been quieter in Q1 2015 than it was through 2014, and that has contributed to a slight slowdown in our rate of growth, so it wasn’t as strong as the first six months of our current financial year but this may be more to do with the General Election than anything else,’ he adds.

Certainly data on legal advisers on deals by volume and value, published by Business Insider for Scotland, shows a transactional market in a healthy position. The combined value of deals advised on by the ten most prolific firms in Scotland (see box above) is £23.5bn for the calendar year 2014, compared to £19.44bn in 2012.

While oil and gas remains a huge driver of business for many Scots firms; financial services remains strong in Edinburgh and Glasgow, particularly in funds and other alternative sources of funding, a similar picture to the City, according to Drummond. Masters points to infrastructure as resurgent, with Pinsents heavily involved in two of the biggest projects in Scotland – the Forth Replacement Crossing and the Aberdeen Western Peripheral route. A number of Scottish firms report that the renewable energy sector is very busy and given the SNP’s commitment to mixed energy sources, this looks likely to continue.

As for other growth areas, DWF’s Pignatelli points to the food and drink sector. ‘The industry is thriving in Scotland with provenance and food innovation driving the sector forward. We are seeing a good level of deal and investment activity in the food and drink sector in Scotland. The Scottish government has recognised the opportunity this sector presents and is investing heavily through the Scottish Year of Food and Drink 2015 and other initiatives, so this looks set to be a key sector for us moving forward.’

National rescue

It is a striking quality of the Scottish legal market that while the country has embraced nationalism, its law firms are far less Scotland-centric. While the post-Lehman years were defined by the decline of the four largest law firms that had put most of their eggs in the HBOS and The Royal Bank of Scotland (RBS) baskets that were eventually carried all the way down to London, allowing more domestically focused firms such as Brodies and Burness Paull to flourish, what is clear is that the upper end of the Scottish market has a far more English hue. What began (DLA Piper aside) in a meaningful sense with Pinsents’ acquisition of McGrigors in 2012 has mushroomed.

The last year has been very much an object lesson. Dundas & Wilson, once the most celebrated of all Scottish firms, posted a revenue decrease of 4.5% to £47m from £49.2m in 2013/14 – a 29% drop over the previous five years, and perhaps the most determinative factor in it going the same way as McGrigors – finally succumbing to a takeover by an English firm in the form of CMS.

Senior figures in Scotland are reserving judgement on the success or otherwise of the Dundas/CMS tie-up, predictably concluding that a year is too soon to make a call. However, the feeling is that the fallout (or predicted blood-bath depending on who you speak to) from the union never materialised. While some of the old guard inevitably departed what was once considered legal royalty in Scotland (most of those long before any merger took place) the belief within the legal market is that many partners were not locked into the firm post-merger (CMS partner Penelope Warne told Legal Business last year that there was no formal lock-in, just extended notice periods for some) and had the option to leave under standard notice periods. Few did. One reason for this could be that Pinsents, which made the original move for McGrigors, is widely considered to have secured a highly successful union, establishing what many view now to be Scotland’s leading law firm with relatively little downside beyond the initial costs and redundancies.

Certainly, CMS’ Ward is clear where he wants to pitch his firm: ‘There is a step between CMS and Pinsents and the firms who are focused almost exclusively on the Scottish market and referral work from England. It is a quite different landscape to the one that existed two years ago to be honest. That in turn has changed the market in terms of recruitment and in terms of what clients are looking for, particularly those with international aspirations.

‘The market is now addressing an international need that it didn’t before. There are more clients and it’s not just big conglomerates etc, pretty much all commercial clients have international aspirations and so there is a greater need for those type of services and there are really only two firms in Scotland that can provide that.’

It is a skewed version of the Scots market that rather glosses over what has been achieved by Brodies and Burness Paull during the last five years but nonetheless does point to an international dynamic that has undoubtedly taken hold. According to Skyscanner’s Jameson, although she prefers to use firms she trusts, particularly local firms, she adds: ‘I try not to use firms that are parochial – in Scotland or elsewhere. I prefer to engage with firms that are a bit broader in their outlook and more forward-thinking in their attitude and their ways of working.’

It is a dynamic that all successful firms are forced to consider. Chris Harte, chief executive of Morton Fraser, which has itself performed solidly during a difficult period economically for Scotland, draws parallels with the independence movement in Scotland.

‘What struck me was that a lot of Scottish firms have had a similar independence debate themselves, ie, do they see their future as being part of a UK-wide or indeed international legal business, or do they see a better future for them as being an independent, regional firm?’ he says. ‘Most firms of any scale have had to have that debate if they haven’t already had it. There is no right or wrong answer. It’s what kind of firm best suits your business and your ambitions for your business. It is a question that Scottish firms need to ask and answer for themselves if they haven’t already.’

That said, more than a few Scottish firms have become more international overnight, thanks to continued consolidation in the insurance sector. The most recent came on the same day as the CMS/Dundas tie-up with LB100 insurance firm BLM acquiring Scottish insurance outfit HBM Sayers on 1 May 2014. This year leading City insurance player Kennedys opened two offices in Glasgow and Edinburgh through partner hires from commercial litigation firm Francis Gill & Co and McClure Naismith, after holding failed merger discussions with Simpson & Marwick in 2013. This means DAC Beachcroft, Shoosmiths, DWF, BLM and Kennedys now have offices in Scotland, most of which were achieved through the takeover of a struggling domestic firm. Clyde & Co, not to be outdone, confirmed just after the General Election that it was in merger discussions with Simpson & Marwick.

These moves are, however, pure insurance plays and have more to do with large insurer clients’ demands for a one-stop shop in the UK than any specific ambitions for Scotland.

‘Insurers are looking for law firms that can advise across borders on UK and Scottish law because they operate on a national and international basis. Providing this seamless UK offering for insurers is a key driver to new firms entering the Scottish market,’ says DWF’s Pignatelli.

However, Martin Darroch, chief executive of Harper Macleod, a full-service Scottish firm with a significant insurance practice that has just recorded a 5% rise in turnover for 2014/15 to £22m, points out that UK firms with large insurer clients that they are beholden to were given little option but to open in Scotland.

Darroch says: ‘Large multinational insurers do not care if there are two legal markets in the UK – to them Scotland is a peripheral market on the edge of Europe. They have turned to the City firms and said they want a one-stop-shop for the UK. We’ve been approached by these firms, but we’ve said we’re happy doing our thing. We’ve adjusted our insurance litigation model to derive work from insurers we know and trust who are not looking for a one-stop-shop or by going direct to consumer.’

This internationalisation at the top end of the market leaves Maclay Murray & Spens and Shepherd and Wedderburn, the last remaining members of the original Big Four in Scotland, in something of a limbo. With Dundas and McGrigors now part of international businesses and Brodies and Burness Paull having made great strides financially by nailing their strategy to a Scotland-only policy, Maclays and Shepherd could be squeezed at both ends.

However, both firms turned in solid performances for the 2013/14 financial period after extended periods in the doldrums. Maclays’ turnover was up 6% to £43.3m, with PEP up by 22% to £257,000. Shepherd, meanwhile, saw revenues grow by 7% to £38.3m, with PEP recovering by 6% to £265,000. But Maclays is persistently touted as being in the market for a UK merger after trying to do a deal with Bond Pearce not so long ago. Kenneth Shand, who took over as chief executive at the start of 2014, certainly added fuel to the fire last summer when he was quoted in The Scotsman as saying the firm was ‘open-minded’ to the idea of consolidation.

Shand is widely acknowledged to be a safe pair of hands and, having stabilised a listing ship, the turnaround at Maclays has been evident to many over the past 12 months.

Shepherd, meanwhile, took bolder steps to secure its position. The legal market was unsurprised but nonetheless dismayed last October when it was revealed that Tods Murray, a 158-year-old business and not so long ago considered one of Scotland’s elite, had entered into administration with debts of around £5m. In an opportunistic move, Shepherd stepped in to buy Tods out of administration, acquiring around 170 staff and paying £595,000 for work in progress.

Gibb says the firm had to do something to improve its position and this was an ideal opportunity. ‘We have been looking for some time to strengthen our market position in Scotland,’ he says. ‘We’d looked at what had happened over the previous few years with Brodies performing really well and Burness doing the Paull & Williamsons [see box, ‘Granite city’] deal. We’ve always felt that we punch above our weight, the quality of the work we do is traditionally very high, but we were stuck in a rut at under £40m in terms of turnover. We were determined to get moving and get ourselves up to being one of the market leaders in Scotland again. This has helped us achieve that in one bound.’

He adds that revenues at the firm are due to be up around 10% for 2014/15, not even taking into account the Tods deal, and is looking at an ‘annualised turnover north of £50m’.

Although Tods Murray isn’t the first high-profile Scottish firm to enter administration (the collapse of Semple Fraser in 2013 being another significant example), some feel it won’t be the last. The mood music in Scotland is that the situation with Tods was not unique – overweight in one area, too much debt, too many overheads – that it could happen to anyone.

‘The fact that a firm of Tods’ standing and repute ends up in administration is worrying,’ says Ward. ‘Semple Fraser was slightly different because it was a niche sort of practice and was very exposed to one part of the market. But Tods was a much broader practice. That suggests that there are firms in that bracket that are going to struggle even as the market picks up. It’s a hugely competitive market – probably the most competitive I have known.’

Darroch, a former chartered accountant, still scratches his head at how some firms are run. ‘There are some surviving purely because the banks funding them are being either very tolerant or simply pragmatic: looking at the indebtedness of some law firms and their exposure, if you’re a bank and you put them down, what are you going to get back? I defy anyone to turn that around, as all a law firm is selling is the knowledge and the brand of the people you have. I have spoken to some struggling firms, but the people there were not prepared to take the medicine that I said they had to take. It would have really transformed their business.’

And Morton Fraser’s Harte says events such as the Dundas/CMS merger and the collapse of Tods Murray have reminded Scottish firms of the importance of responding to market volatility. ‘What all businesses have been shaken out of over the last number of years is any sense of complacency around their place in the market,’ he says. ‘Firms will increase in scale but there will be fewer of them. We have no divine right to make profits or sustain a business.’

Just as the political landscape in Scotland has shifted dramatically in the last couple of years, so has its legal market – in a completely divergent manner. And after the battle has been lost and won, so begins a struggle for power in a market where the status quo has been turned on its head. LB

mark.mcateer@legalease.co.uk; kathryn.mccann@legalease.co.uk